Canada’s investment watchdog has published a new interim framework governing digital asset custody on the basis that it seeks to address the “technological, operation, and legal risks unique to digital assets.”
The watchdog is the Canadian Investment Regulatory Organization (CIRO), which is a self-regulatory organization. Any company operating as an investment dealer or broker in Canada, including with regard to digital assets, must gain membership with the CIRO to operate compliantly.
Changes to regulatory expectations are effected by amendments to its membership conditions, which is what the interim framework is doing.
The framework focuses on dealer/broker relationships with custodians of digital assets. CIRO distinguishes between custodians of “crypto assets” (like BTC) and those of “tokenized assets.” Both are affected by the interim framework, but tokenized asset custodians must also comply with the traditional custody framework applicable to standard assets.
Custodians will now be distinguished by four “tiers” depending on the standards they meet, including controls for regulatory oversight, technology assurance, operational resilience, and capital.
For example, to qualify as a “tier 1,” custodians must have capital of at least $100,000,000 if based in Canada or $150 million if based overseas. Tiers 2-4 require capital of $10 million for Canadian custodians and $100 million for overseas custodians.
Custodians have different responsibilities depending on which tier they fall into. Those in a higher tier are often put under more relaxed obligations than those in lower tiers, but this isn’t always the case.
For example, custodian tiers 2-4 are required to conduct independent penetration testing, whereas the highest-tier custodian is not. On the other hand, the two highest tiers of custodians must hold comprehensive insurance across all of their storage locations, regardless of whether hot or cold. In contrast, tiers 3 and 4 are under lesser obligations.
Each tier custodian is permitted to hold different percentages of a broker/dealer’s assets; for instance, tier 1 custodians, which meet the highest standards set out by CIRO, are permitted to hold up to 100% of a dealer’s assets. Tier 4 custodians may only hold 40%.
In the preamble to the framework, CIRO writes that “historical failures in the crypto sector, including losses due to hacking, fraud, inadequate governance and insolvency, have demonstrated that custody arrangements are a critical point of investor vulnerability.”
Though not named explicitly, readers will likely be reminded of the high-profile 2019 collapse of QuadrigaCX, Canada’s largest digital asset exchange at the time. QuadrigaCX was revealed to be a fraudulent scheme to take money from investors on the promise of buying digital assets on their behalf, but investigators, after its collapse, found that the money had been spent on luxury travel, real estate, risky bets, and other spending.
Though effective immediately, the published framework says that CIRO will “consider appropriate transition arrangements… on a case-by-base basis.” CIRO is also careful to point out that the framework is intended as an interim one and that “over time, elements of this framework may inform the development of permanent rules or harmonized regulatory instruments as crypto asset markets mature.”
Read the full framework here.
Watch: What’s ahead for crypto regulation? Highlights from Blockchain Futurist Conference 2025
Source: https://coingeek.com/canada-regulator-shores-up-digital-asset-custody-rules/
